Question

For various reasons related to trying to prevent a catastrophic recession during the pandemic, the federal government has and will continue to borrow trillions of dollars. Fortunately, they can borrow this money at a low interest rate. a) Assuming the government borrows $6 Trillion at a 0.5%, what is the required uniform annual payment to completely pay off this debt in 20 years

Answer 1

$0.316 trillion per annum

Step-by-step explanation

According to the scenario, computation of the given data are as follow:-

Interest rate = 0.5% = 0.005

Government Borrows = $6 trillion

Time = 20 years

Required Uniform Annual Payment= Government Borrows × Interest Rate × [(1 + Interest Rate)^Time period ÷ (1 + Interest Rate)Time period] - 1

= $6 trillion × 0.005 × [(1 + 0.005)^20 ÷ (1 + 0.005)^20 - 1]

= $0.03 trillion × [(1.005)^20 ÷ (1.005)^20 - 1]

= $0.03 trillion × (1.1049 ÷ 1.1049 - 1)

= $0.03 trillion × (1.1049 ÷ 0.1049)

= $0.03 trillion × 10.533

= $0.316 trillion per annum